Reich: Trump's tax cut is fueling stock buybacks, not wage increases

President Donald Trump has signed into law a $1.5 trillion tax overhaul package. Trump touted the size of the tax cut, declaring to reporters in the Oval Office before he signed it Friday that "the numbers will speak."

President Donald Trump has signed into law a $1.5 trillion tax overhaul package. Trump touted the size of the tax cut, declaring to reporters in the Oval Office before he signed it Friday that "the numbers will speak."

Robert B. Reich

Donald Trump’s promise that corporations will use his giant new tax cut to make new investments and raise workers' wages is proving to be about as truthful as his promise to release his tax returns.

The results are coming in, and guess what? Almost all the extra money is going into stock buybacks. Since the tax cut became law, buy-backs have surged to $88.6 billion. That's more than double the amount of buybacks over the same period last year, according to data provided by Birinyi Associates.

Compare this with the paltry $2.5 billion worth of employee bonuses corporations say they'll dispense in response to the tax law, and you see the bonuses for what they are: a small fig leaf to disguise the big buybacks.

If anything, the current tumult in the stock market will fuel even more buybacks.

Stock buybacks are corporate purchases of their own shares of stock. Corporations do this to artificially prop up their share prices.

Buybacks are the corporate equivalent of steroids. They may make shareholders feel better than they would otherwise, but nothing really changes.

Money spent on buybacks isn't reinvested in new equipment, research or factories. Buybacks don't add jobs or raise wages. They don't increase productivity. They don't grow the American economy.

Yet CEOs love buybacks because most CEO pay is now in shares of stock and stock options rather than cash. So when share prices go up, executives reap a bonanza.

At the same time, the value of CEO pay from previous years also rises in what amounts to a retroactive (and off the books) pay increase — on top of their already humongous compensation packages.

Big investors also love buybacks because they increase the value of their stock portfolios. Now that the richest 10 percent of Americans own 84 percent of all shares of stock (up from 77 percent at the turn of the century), this means even more wealth at the top.

Buybacks used to be illegal. The Securities and Exchange Commission considered them unlawful means of manipulating stock prices, in violation of the Securities Acts of 1933 and 1934.

In those days, the typical corporation put about half its profits into research and development, plant and equipment, worker retraining, additional jobs and higher wages. But under Ronald Reagan, who rhapsodized about the "magic of the market," the SEC legalized buybacks.

After that, buybacks took off. Just in the past decade, 94 percent of corporate profits have been devoted to buybacks and dividends, according to researchers at the Academic-Industry Research Network.

Last year, big American corporations spent a record $780 billion buying back their shares of stock. And that was before the new tax law.

Put another way, the new tax law is giving America's wealthy not one but two big windfalls: They stand to gain the most from the tax cuts for individuals, and they're the big winners from the tax cuts for corporations.

This isn't just unfair. It's also bad for the economy as a whole. Corporations don't invest because they get tax cuts. They invest because they expect that customers will buy more of their goods and services.

This brings us to the underlying problem. Companies haven't been investing — and have been using their profits to buy back their stock instead — because they doubt their investments will pay off in additional sales.

That's because most economic gains have been going to the wealthy, and the wealthy spend a far smaller percentage of their income than the middle class and the poor. When most gains go to the top, there's not enough demand to justify a lot of new investment. Which also means that as long as public policies are tilted to the benefit of those at the top — as is Mr. Trump's tax cut, along with the legalization of stock buybacks under Reagan — we're not going to see much economic growth.

We're just going to have more buybacks and more inequality.

Robert Reich, a former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley. Robert Reich's new book, "The Common Good," is out Feb. 20. His documentary, "Saving Capitalism," is available on Netflix.